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Ohio Attorney General Cordray Joins BofA Litigation Club
Ken Lewis' litigation fan club just got some new fans. Looks like one more person, this time Ohio Attorney General Richard Cordray, is joining the fight against what Dick Bove has called the "great distraction." And while Dick would undoubtedly love to bury not just the Merrill scandal deep under the carpet, but also all his recommendation calls from last year, others seem less sanguine about what virtually everyone (except the bank itself, of course) acknowledges is blatant securities fraud. The Attorney General noted in the class action lawsuit, filed on behalf of five pension funds,
that he could seek billions in damages. More relevantly, he plans to
take sworn testimonies from such current and former executives Mr. Lewis and the commode expert himself, John Thain.
“They were concealing billions of dollars in losses with one hand and
clearing the way for extravagant bonus payments with the other,” said
Attorney General Cordray. “This case gives the public pension funds
and other shareholders a chance to stand up against Wall Street.”
The lawsuit alleges that Bank of America, during merger
negotiations, agreed to allow Merrill Lynch to pay up to $5.8 billion
in discretionary year-end bonuses to its executives and employees, but
failed to disclose that material information important to shareholders.
Additionally, in the two months just prior to the shareholder vote
on the merger, Merrill Lynch suffered billions in losses. The
complaint alleges that senior executives at both Merrill Lynch and Bank
of America were aware of these massive and highly material losses but
did not disclose the information to investors prior to the vote.
And some more informative disclosures from the lawsuit:
During the abbreviated merger negotiations, BoA and Merrill spent considerable time negotiating the discretionary year-end bonuses that Merrill executives and employees would receive for 2008. The bonus discussions lasted until 2 a.m. on September 15, and ultimately BoA agreed to allow Merrill to pay up to $5.8 billion in discretionary year-end bonuses – an amount which represented 12% of the merger price, and more than 75% of the “record” $7.5 billion profit Merrill had reported in 2006 (the last year it would ever report a profit). BoA, Thain, and Lewis also agreed to allow Merrill to accelerate payment of these bonuses so that Merrill could pay them in December 2008, before the merger closed, rather than in January, when bonuses were supposed to be paid at Merrill, to ensure that Merrill would be able to exercise significant control over the bonus amounts and the recipients of the bonuses.
Throughout October and November 2008 – the two months immediately preceding the December 5, 2008 shareholder vote on the merger – Merrill and BoA suffered highly material undisclosed losses that greatly jeopardized the solvency of Merrill and the combined company. In October 2008 alone, Merrill lost a staggering $7 billion. In November 2008, Merrill lost an additional $6.3 billion, and also suffered a goodwill impairment of another $2 billion in connection with the failure of its wholly-owned subprime residential mortgage lender. Thus, by the date of the merger vote, Merrill had lost at least $15.3 billion in just two months – and Merrill was internally projecting billions of dollars of additional losses in December. The losses were
And a slighlty different spin on the Fed's involvement in the fiasco:
After reviewing Merrill’s and BoA’s financial data, senior officials of the U.S. Federal Reserve System (the “Federal Reserve”) concluded that Lewis’s claims of surprise were “not credible,” and that Merrill’s financial deterioration had been “observably under way over the entire quarter.” Indeed, documents and other evidence establish that Merrill’s losses were far greater in October and November 2008 than in December 2008, and that BoA, which had appointed its Chief Accounting Officer, Neil A. Cotty (“Cotty”), to be Merrill’s acting CFO when the merger was announced, knew of these losses as they occurred. Accordingly, Secretary Paulson and Chairman Bernanke told Lewis that invoking the MAC “after three months of review, preparation and public remarks by the management of Bank of America about the benefits of the acquisition” would reveal the falsity of those statements, and “cast doubt in the minds of financial market participants . . . about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk management processes, and the judgment of its management.” As Secretary Paulson later testified to Congress, he also told Lewis that, if Lewis invoked the MAC, Lewis, BoA’s senior management, and BoA’s Board of Directors (the “BoA Board”) would be terminated.
After this threat, Defendant Lewis agreed not to invoke the MAC, and to proceed with the merger. However, in order to prevent BoA’s collapse from the weight of Merrill’s losses – which by that point were approaching $20 billion for the quarter – Lewis asked for and obtained a commitment that BoA would receive a $138 billion taxpayer bailout, consisting of a highly dilutive $20 billion capital infusion and an asset guarantee of $118 billion. Recognizing that disclosure of these facts would lead to a shareholder revolt and almost certainly prevent the merger from closing – and thus cost him his job – Defendant Lewis actively concealed the Government’s commitment from his shareholders. In a December 22, 2008 email to the BoA Board, Lewis wrote, “I just talked with Hank Paulson. He said there is no way the Federal Reserve and the Treasury could send us a letter of any substance [documenting the bailout] without public disclosure which, of course, we do not want.”
One wonders just how many civil and/or criminal lawsuits against him will it take for Ken Lewis to finally get the message that people are not crazy with the way he handled the whole Merrill thing. At least according to Gasparino the tipping point may occur if and when the SEC decides not to drop its charge against the firm, and to finally extract its pound of flesh from the guilty parties.At this point this seems like the only way out for the troubled CEO. Yet with the SEC attempting to rectify its devastated public image, it appears that Ken will be the fall guy for the second and last time in his career: first for the benefit of Ben Bernanke, and now, for Mary Schapiro. As to the next logical question of who will replace Lewis, the answer is still unknown although several key candidates are already solidifying.
Full lawsuit presented below, which is a must read for all, who unlike Dick Bove, think that lying to your shareholders about the mismanagement of several tens of billions of dollars, is actually a kinda of a big deal.
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Guys, it's football season. No one in America cares about BAC/MER merger. That is so December '08 when the Hammer was running policy. Can't we concentrate on who is going to win Dallas/Carolina on MNF?
If we're going to talk football let's at least talk about something that matters like college football, rather than the No Fun League.
I agree, it is a whole lot more fun to tell those Tennessee bloggers that their front line could not block my crippled grandmother. To heck with the crooks. They will be there after the Super Bowl. Florida takes the BCS Championship this year also.
Dallas by 9.
Yea maybe if we can get some of TD's smarmy wit applied toward something more relevant like fantasy picks the MSM would come around and start accepting these bloggers as credible people. At least then maybe we could be making bets based on fundamentals.
Lewis' raging incompetence borne of his own unquelchable arrogance will certainly eventually catch up with him. Just a pity nobody tipped a hat to let poor Ken in on the fact that his own (BAC) shareholders just didn't possess the same ancient bloodlines as those deep inside Mother Merrill and therefore it was obvious if given the choice who would be required to take the haircut both in and out of the boardroom.
Completely agree. Ken Lewis stated in PBS' Frontline "Inside the Meltdown", his dream was to build a bank in the south that could dominate the NY/Ivy League run banks. Are you completely out of your mind!??? Since when will NY give up their permanent vote on the Fed Board of Govenors? Since when will NY cede any power to a southern bank? Ever!? The organization of the Fed was a long time coming after the Civil War. Listen Ken, that war is over. Not only that, you had former Princeton Prof Emeritus Bernanke and the Dartmouth "Hammer" Paulson and you were still giving them grief!!? Lewis completely out of his league, and deserves what he gets.
Please pardon my vulgarity but this wasn't just incompetence by Ken Lewis. This was a Grade A Number 1 cluster fuck by all parties involved and we can all guess who were the fuckers and who were the fuckee(s) in this mess.
hey there mary s
the AGs are doing it
because you have not
Knew that was coming DH... we even discussed it a couple of weeks ago.
yep layne! the ag's smell blood. lewis is so done it's not even funny.
paulson looks to be in big trouble too. bernanke should be in hell for this as well but it appears that he kept his mouth shut more than paulson...that said, he was clearly aware of what was going on, which goes to Ned's conspiracy matter...
btw, read the piece of MERS, Kansas etc. If these various state judges keep picking away at it (they will), this will end up in the Fed courts. I just don't see a wholesale blowout of MERS and the lenders on this matter. If anything, it will just drag things out longer as the case by case matter will be so time consuming...then again, the banks will probably love it to further avoid taking hits on the shadow inventory.
Once again, the sequence of events points to material participation by Paulson and Bernanke in a conspiracy to defraud the shareholders of BofA. They threatened Lewis and his Board, and further provided them with a material inducement to conclude a merger they knew full well was to proceed without disclosure of the losses or the bonuses or it would not proceed as they - Paulson and Bernanke - had planned all along. This ain't tin hat stuff, this is just garden variety securities fraud.
Bove is just another Wall Street syncophant douchebag.
The picture in still a little fuzzy in my mind-Did the oligarchy throw BofA off the wagon to get the wolves to stop chasing them or, did the wolves, while hunting for the oligarchy, find BofA wondering aimlessly in the back country?
A greedy but naive southerner,who wanted to be a part of Wall St. at any cost, but eventually was trapped by typical New york mafia tactics(lol)????
Read the complaint. Unbelievable. Assuming the allegations are mostly accurate, and they seem to be, I'd say enough facts are admitted on the record that it seems that judgment against Lewis, Thain and the entire BofA Board based on the pleadings alone is but a few motions away. Game over.
The really interested, unprecedented part of this is the part played by Paulson and Bernanke. If the allegations are true, then Lewis and the Board were going to invoke the Material Adverse Change clause at the 11th hour (whereby MACs occurring after the execution of the merger document relating to ML's financials would excuse BofA's performance in terms of closing the deal). While embarassing and a bunch of other things, the deal would have died, and Merrill would have gone belly-up. But something extraordinary occurred: Paulson ordered Lewis that the deal had to go through, one of several appearances he made throughout the narrative making threats and demanding, first, that the intial merger agreement be negotiated, agreed to and signed over a weekend, second, that Lewis and his Board would be canned if they even thought about invoking the MAC clause (in the early stages as the losses were mounting), and finally again, at the 11th hour, when they were going to invoke it, by again repeating the removal threat AND this time offering the immense secret bailout package.
At least three times Paulson personally intervened to order that the merger be done, knowing full well a major securities fraud was being committed and would be committed if the deal consummated without the requisite disclosures. Bernanake is no better, as there are allegations Scott Alvarez (the guy in the recent Alan Grayson video) opined internally at the Fed that securities laws were being broken.
The simple fact here is that Lewis was foolish and power mad/hungry, but there were others in the room who also wanted the deal to go through, demanded it and, at the 11th hour faciliated it by bribing BofA into complicity: Paulson and Bernanke.
Somebody tell me how Paulson and Bernanke walk away from this? This is a criminal securities conspiracy in which they willingly and actively participated. But for their involvement it would not have even occurrred - they are the Ringleaders!
Another impression: the astonishing amount of lying by everyone involved.
Ned...thank you for your summary.
This is a watershed moment for the rule of law in this country.
If I were advising you, Mr. Obama, I would strongly suggest you get out in front of this one. Though Paulson isn't your problem, the rest are and that includes Geithner, Bernanke, and Mary Schapiro.
Please don't blow it Mr. President.
If this lawsuit gets any traction, I suggest that a few people with 401K's get together with a willing lawyer and start their own class action lawsuit against Paulson and Bernanke. Given enough drops of water, even the best built dam will burst.
I just finished reading through the doc....wow!
folks, if you are into this matter, it's a hell of a read.
Ned, the Federal Reserve and the Department of the Treasury have total freedom of action when operating under a National Security Executive Order. In fact the threats from Paulson & Bernanke were baseless simply because to remove Lewis & the Board at BofA would have has worse effects for the economy & banking system than a failure of Merrill would have had. However, BofA just could not get past the fact that they are indeed the biggest depositor institution in the country and had the clout to really work the system with far more juice than GS at the time, but folded.
Back on point. Bernanke & Paulson have total immunity from federal prosecution and if prosecuted in state court would be given a presidential pardon from whomever happened to be holding the office at the time. Facts of life.
The complaint, as unbelievable as it may read is simply one more example of how the power of the executive has been and continues to operate. I am no longer amazed or find these actions, however repugnant, unbelievable.
Too many years on the inside I suppose...
As to the next logical question of who will replace Lewis,
The answer.. Lloyd Blankfein for less than JPM paid for WaMu after the feds allow BA's CRE, credit card, 1st & 2d mortgage portfolios to implode requiring immediate efforts to stabilize the system. After all, Ken Lewis is the crook and it will all be his fault. Heck, the fed might even be able to hide the situation at WF in the swirl by extracting the Golden West/Wachovia option ARM disaster and bundle it with the BA action.
Wilbur Ross, eat your heart out.
Miles: A few posts back on this subject weeks ago I asked that very question: will Obama pardon Bernanke and Paulson? And as for immunity, the simple act of forcing them to claim immunity will be enough for me - immunity is the last resort of informants and crooks, and that is how it will be perceived. And Nixon was pardoned too, but that did not cleanse the disgrace. My hope is that sunlight will operate as a decent disinfectant. And publicizing these allegations while the Audit the Fed bill is being considered is a very good thing.
thanks Ned and Miles....
We are in complete agreement on point Ned.
Nothing To Add... For once.